In a major legal development, FTX, the now-bankrupt crypto exchange, has filed a lawsuit against its former CEO, Sam Bankman-Fried, along with other former key executives, seeking to recover more than $1 billion in allegedly misappropriated funds. The complaint, filed on July 20 in a United States Bankruptcy Court, also named former Alameda Research CEO, Caroline Ellison, FTX co-founder Zixiao “Gary” Wang, and former FTX engineering director, Nishad Singh, as defendants.
FTX claims former executives misappropriated $1 billion
The lawsuit accuses the former executives of breaching their fiduciary duties by continuously misappropriating customer funds to finance luxury condominiums, political contributions, “charitable” donations, speculative investments, and personal pet projects. FTX contends that the defendants abused their positions of control over the exchange and its related companies, resulting in what the complaint characterizes as “one of the largest financial frauds in history.”
The lawsuit alleges that the defendants created an environment in which a select few employees wielded almost unrestricted power to oversee transfers of fiat and crypto assets. Moreover, they granted themselves the authority to hire and fire employees with minimal oversight on the exercise of these powers. FTX further asserts that the former executives issued over $725 million worth of equity to themselves, providing no corresponding value to the debtors in return.
Additionally, the lawsuit claims that Bankman-Fried and Wang misappropriated an additional $546 million to purchase shares in the trading platform Robinhood. The filing points out specific instances of alleged financial misconduct. Ellison reportedly paid herself $28.8 million in bonuses and used $10 million from those funds to acquire a stake in an artificial intelligence company.
Moreover, on January 24, 2022, Bankman-Fried purportedly transferred $10 million as a “gift” from his FTX US account to his father’s account on the same exchange. Subsequently, Bankman-Fried’s father initiated six transfers totaling $6.75 million to his accounts at Morgan Stanley and TD Ameritrade. FTX contends that this “gift” is being utilized to fund Bankman-Fried’s legal defense.
The lawsuit alleges fraud and misappropriation of funds
According to FTX’s claims, many of these alleged fraudulent transfers took place while the exchange was insolvent, a fact that the defendants were allegedly well aware of. Although FTX initially disallowed accounts carrying a negative balance, Bankman-Fried reportedly directed associates to modify the exchange’s code. This alteration allowed FTX to continue regular operations despite running “very large deficits.”
By March 2022, Ellison purportedly estimated that the FTX exchange had a cash deficit exceeding $10 billion. Following the bankruptcy filing on November 11, 2022, FTX and its subsidiaries are now under the leadership of restructuring chief and CEO, John Ray. The lawsuit marks a significant milestone in the ongoing efforts to uncover and address financial improprieties in the crypto industry.
As the legal proceedings progress, the crypto community will closely monitor the outcomes and implications of this case on the broader crypto landscape. Investors and customers are advised to exercise caution and due diligence while engaging with crypto exchanges and platforms. Ensuring the security and transparency of funds remains paramount in safeguarding against potential fraudulent activities.
FTX’s legal action against former CEO Sam Bankman-Fried and other former key executives sheds light on the alleged misappropriation of customer funds amounting to over $1 billion. The lawsuit alleges breaches of fiduciary duties and abuse of control, resulting in significant financial fraud. As the case unfolds, its outcome may have far-reaching consequences for the crypto industry, emphasizing the need for heightened vigilance and adherence to ethical practices within the sector.
